China will help U.S. farmers with our surplus

Can you imagine the ire of Congress and the U.S. taxpayer if American farmers received subsidies for insurance, a subsidy for the county where the farm was located, a subsidy for raising grain, a subsidy for machinery, a subsidy for using better seed, all on top of another payment for producing grain? There are some farmers who benefit from all of that largess from the public, via the government. But don’t expect the government to shutdown because the budget is not balanced.

With all the furor over a crop insurance program for farmers and a desire to cut back the food stamp program in the U.S., all of those above-mentioned subsidies are being provided to farmers in China, which spent $75 billion in 2012, or 11% of the value of the total farm production in China to support agriculture. Those eye-opening facts are from the October issue of Amber Waves, from the USDA’s Economics Research Service.

The ironic part of the financial support program benefitting Chinese farmers is their inability to increase production, and it has lead to massive imports of corn, soybeans, and frozen meats from the U.S. USDA economist Fred Gale reports, “Much of the funding was allocated for measures that make little immediate contribution to incomes of farmers, including construction of irrigation systems, storage of commodity reserves, programs to create model farming districts, and loans for nonfarm agribusinesses. The fastest growing component of farm payments was a general input subsidy to grain producers that was tied to annual increases in fertilizer and fuel prices. In 2012, direct payments for rice and wheat producers were estimated at $100 or more per acre in many localities.”

Another irony is the fact the subsidies have not kept pace with the cost of production and while agricultural income in China is tightly pinched, off-farm income has risen. Many farmers are opting for urban jobs, saying they have had all the fun on the farm they can stand. In an effort to stem the tide of farm to city migration, Chinese officials began higher subsidies for agricultural production. The result is corn being supported at $9 per bushel and soybeans supported about $20 per bushel. Since Chinese farmers cannot produce enough, other farmers around the world, including those in the U.S. are happy to export grain to Chinese ports. While U.S. farmers are not getting $9 and $20 for their corn and beans being sent to China, the Chinese demand for grain has provided a new outlet and reduced the carryover by nearly a billion bushels for each.

Gale says the result of the Chinese policy is to keep prices high and a strategy of storage as long as possible. “The stated goal of the price support programs is to prevent steep declines in farm prices by purchasing commodities during periods of slack demand. Tying the floor price to increases in production costs and requiring commodities to be resold at a higher price that recovers storage costs builds in a strong tendency for prices to increase.”

Because of the ability for the U.S. market to ship high quality grain rapidly to China, the U.S. farmer has been the beneficiary of Chinese agricultural policies according to Gale, “U.S. farmers have been major beneficiaries of a Chinese agricultural import boom that coincided with the growth in Chinese agricultural support. China is now the leading destination for U.S. agricultural exports (up from seventh in the early 2000s). U.S. agricultural exports to China totaled $5 billion in 2003—the year before China began its direct subsidy payments. By 2012, U.S. sales of agricultural commodities to China had risen more than fivefold to nearly $26 billion per year. China now accounts for 18 percent of U.S. agricultural export sales, up from 8 to 9 percent during 2003-07.”

Summary

China’s growing population has required substantial changes in its agricultural policies. The result has been a complex web of high subsidies for every facet of agriculture, and grain prices maintained at high levels. While China does not pay those high levels for its purchases, U.S. grain has been flowing in high volumes to China in the past several years as that country’s main food supplier.